Paradigm Capital: Trevali Mining Swings to Become Free Cash Positive

Investment Thesis. With Trevali Mining Corporation (TSX:TV) Santander mine generating positive cash flow and its second mine, Caribou, now commercial, the growth story is coming together for Trevali. Caribou more than doubles Trevali’s production profile and the successful start-up materially de-risks the company. We see a continuation of the current tightening supply/demand fundamentals within the zinc market delivering additional financial upside to the Trevali operations.
Event
Trevali reported strong Q3 financial results, modestly ahead of our forecast. Q3 operational results were pre-announced on October 13 and guidance was maintained at that time.
Highlights

• Q3 Cash Generation Ahead of Forecast | With the Caribou mine declared commercial on July 1, and zinc prices on the rise, TV reported materially higher revenue, earnings and cash flow in Q3. Revenue doubled q/q to $57M while adjusted EBITDA improved to $15.9M (+94% q/q and 3% above our estimate). Adjusted earnings were $2.3M ($0.01/sh) and operating cash flow increased to $13.8M ($0.03/sh), both in line with our estimates. Importantly, the operations were free cash positive and unrestricted cash increased by $3.5M to $13M.
• Caribou Cash Costs Better than Forecast | Q3 production was pre-announced at 16Mlb Zn (+2% q/q), 6Mlb Pb (-5% q/q) and 170Koz Ag (+0% q/q), for combined production of 24.0Mlb ZnEq (-1% q/q). Despite the increased mill maintenance downtime, site operating costs were better than we had expected at US$59/t milled. Consequently, C1 cash costs were an impressive $0.77/lb ZnEq ($0.08/lb ZnEq better than our forecast).
• New SAG mill liners and lifters are now installed which have increased mill throughput rates materially thus far in Q4 (to ~2.8Ktpd or 95% of design).
• Consequently, production guidance has been maintained, which implies a substantial increase in Q4 to ~34Mlb ZnEq (+42% q/q), while operating cost levels are anticipated to be relatively stable.
• We continue to expect Caribou to produce ~108Mlb ZnEq this year (of which ~58Mlb is commercial production), with cash costs of $0.76/lb ZnEq.
• Santander Has Another Excellent Quarter | Q3 production was pre-announced and remained strong at 17Mlb Zn (+10% q/q), 4Mlb Pb (-25% q/q) and 192Koz Ag (-13% q/q), for combined production of 23.7Mlb ZnEq (-2% q/q). Cash costs in the quarter were in line with our expectations at $0.68/lb ZnEq (+9% q/q).
• We look for Q4 to be almost a repeat performance of the strong Q3 result and maintain our 2016 forecast of ~94Mlb at a cash cost of $0.63/lb (all ZnEq).
• We expect a resource update near year-end to materially improve upon the existing estimate owing to the ongoing exploration success with the discovery and expansion several high-grade mantos, including the Oyon, Fatima and Rosa zones.

Valuation & Conclusion
Caribou exceeded our operating cost expectations in Q3, and with the mill throughput rates approaching design levels thus far in Q4, we forecast a very strong (both operational and financial) Q4. We have tweaked our estimates and now look for consolidated production to increase ~20% in Q4. Combined with improved commodity prices, we forecast operating cash flow to increase to ~$25M (+80% q/q) and for the company to be materially free cash positive to end the year. We are modestly increasing our target price to $1.35 (was $1.25) and maintaining our Buy rating.
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